Kames’ Roberts: Bond markets overcame ‘mild hysterics’ in July

Kames Capital head of fixed income David Roberts says the majority of bond assets managed to return to “positive territory” at the end of July following the recent sell-off.

Roberts describes investors’ flight from bonds during May and June this year, which was sparked by fears of QE tapering, as “mild hysterics”. However he notes a more positive change in investor attitudes in July.

He says: “Fixed income investors exerted more self control in July. As a result, bond markets returned to a more stable footing with the majority of asset classes ending the month in positive territory.”

Roberts attributes this rebound to investors re-evaluating the Federal Reserve’s key comment on QE. However he argues that the market still needs to better understand the clear distinction between what is standard monetary policy and QE tapering.

He adds: “The market psyche hasn’t been quite so rational and investors have treated them as one and the same. Therefore, breaking this link is essential to return to normality: a focus on fundamentals and differentiated market performance.

“Broadly speaking, risk assets are still being unduly influenced by potential changes to US monetary stimulus. However, we are slowly starting to see fundamentals reassert themselves. Furthermore, indiscriminate investor selling has created some alpha opportunities, raising volatility in core sovereign markets and emerging market debt alike.”

Improvements in corporate bond values during July saw investors bring credit risk back into portfolios throughout the month, says Roberts. Buyers also to used this opportunity mostly to reduce underweight positions rather than establish new long ones, he adds.

Elsewhere in corporate bonds, Roberts says new issuance was low, resulting in investors having to “chase” assets in secondary markets. Within the high yield market, he also notes that prices were able to ”rebound from oversold positions”.

Emerging market debt proved the expception as the “single most disappointing segment” during July, according to Roberts. However he adds that this performance was “in line with expectations.”

German bunds underperformed other core government markets on strong economic data, adds Roberts, with UK gilts initially following in a similar pattern over the course of the month.